Holiday Home (Again)
Discussion
Forgive the reputation of a much discussed topic here boys and girls, but I have searched through previous threads about the topic but can't find anything that answers what we need so here goes.
We are in the early stages of thinking of purchasing a modest holiday home for around £100k, financed by 30% deposit (majority from savings, remainder added to existing home mortgage). We would be hoping to let out either privately or through an on site management company for some weeks throughout the year to make a dent in the site fees. We know we won't make anywhere near a profit through this, but so long as we can generate some income to offset some of the cost we are happy.
I am really struggling to get my head round the tax side of things though, so before we go to the expense of searching out a financial advisor/accountant to take proper advice from, I wondered if anybody could help me on the following:
Could anybody simplify the tax side of things please? As far as I can tell I would pay tax on all my rental income (i am a higher rate tax payer), but claim tax relief on all expenditure (would site fees and mortgage interest come under this as well as furnishings etc?). Are there any crafty ways I can use the rules to my advantage?
If the mortgage is taken in joint names (myself and my partner) how would the tax side of things work then? Could it be placed my my partners name who is a lower rate tax payer if our income happened to exceed our expenditure? Could we change from year to year if we expected to have to pay out for furnishings one year and not the next?
Apologies if I am asking stupid questions, just wanting to get a few pointers before getting deeper into it - I'm just a normal bloke with very little experience of tax and taxation so need some help please from the experts!
Thanks in advance.
We are in the early stages of thinking of purchasing a modest holiday home for around £100k, financed by 30% deposit (majority from savings, remainder added to existing home mortgage). We would be hoping to let out either privately or through an on site management company for some weeks throughout the year to make a dent in the site fees. We know we won't make anywhere near a profit through this, but so long as we can generate some income to offset some of the cost we are happy.
I am really struggling to get my head round the tax side of things though, so before we go to the expense of searching out a financial advisor/accountant to take proper advice from, I wondered if anybody could help me on the following:
Could anybody simplify the tax side of things please? As far as I can tell I would pay tax on all my rental income (i am a higher rate tax payer), but claim tax relief on all expenditure (would site fees and mortgage interest come under this as well as furnishings etc?). Are there any crafty ways I can use the rules to my advantage?
If the mortgage is taken in joint names (myself and my partner) how would the tax side of things work then? Could it be placed my my partners name who is a lower rate tax payer if our income happened to exceed our expenditure? Could we change from year to year if we expected to have to pay out for furnishings one year and not the next?
Apologies if I am asking stupid questions, just wanting to get a few pointers before getting deeper into it - I'm just a normal bloke with very little experience of tax and taxation so need some help please from the experts!
Thanks in advance.
There are no stupid questions.
You could get guidance on here but ask yourself, at the end of Year One who is going to prepare the accounts and tax return? There are two possible answers,
1. "I'm going to do it myself". Seriously? If you're asking these questions now I doubt you have enough knowledge to do the accounts and tax return,
or
2. "I'm going to get an accountant to do it." In which case you would IMO be well advised to talk to an accountant before you start.
Sorry, but that's the way I see it.
Simple answer? Stick it in your partner's name and claim everything you can. This is not without risk.....
You could get guidance on here but ask yourself, at the end of Year One who is going to prepare the accounts and tax return? There are two possible answers,
1. "I'm going to do it myself". Seriously? If you're asking these questions now I doubt you have enough knowledge to do the accounts and tax return,
or
2. "I'm going to get an accountant to do it." In which case you would IMO be well advised to talk to an accountant before you start.
Sorry, but that's the way I see it.
Simple answer? Stick it in your partner's name and claim everything you can. This is not without risk.....
Ozzie Osmond said:
There are no stupid questions.
You could get guidance on here but ask yourself, at the end of Year One who is going to prepare the accounts and tax return? There are two possible answers,
1. "I'm going to do it myself". Seriously? If you're asking these questions now I doubt you have enough knowledge to do the accounts and tax return,
or
2. "I'm going to get an accountant to do it." In which case you would IMO be well advised to talk to an accountant before you start.
Sorry, but that's the way I see it.
Simple answer? Stick it in your partner's name and claim everything you can. This is not without risk.....
Thanks for taking the time to reply.You could get guidance on here but ask yourself, at the end of Year One who is going to prepare the accounts and tax return? There are two possible answers,
1. "I'm going to do it myself". Seriously? If you're asking these questions now I doubt you have enough knowledge to do the accounts and tax return,
or
2. "I'm going to get an accountant to do it." In which case you would IMO be well advised to talk to an accountant before you start.
Sorry, but that's the way I see it.
Simple answer? Stick it in your partner's name and claim everything you can. This is not without risk.....
I agree completely about the tax return, I don't have a chance of being able to complete (at least to start with) one so will certainly need to take professional advice and I will do soon - just wanted to try get my head round a few of the basics before spending the cash. Another attempt at a daft question, does it matter who actually owns the property (or at least who's name is on the mortgage) or could she claim/pay the tax on a holiday let that I "own"?
thanks
How much do you trust your partner? I'm a higher rate taxpayer and almost all our investments are in Lady B's name.
Onsite management do the letting? You might want to check what percentage they charge. 20% isn't unheard of!!
Sit down and look at all the figures in the cold light of day .
Onsite management? Is this a caravan/home park? If so is there scope for capital growth?
Onsite management do the letting? You might want to check what percentage they charge. 20% isn't unheard of!!
Sit down and look at all the figures in the cold light of day .
Onsite management? Is this a caravan/home park? If so is there scope for capital growth?
Edited by Sir Bagalot on Sunday 14th August 01:48
We were in a similar position and the links below will help explain what you can do.
http://www.taxlandlord.com/tax-saving-trust-declar...
http://www.property-tax-portal.co.uk/taxarticle100...
http://www.property-tax-portal.co.uk/taxquestion24...
http://www.taxlandlord.com/tax-saving-trust-declar...
http://www.property-tax-portal.co.uk/taxarticle100...
http://www.property-tax-portal.co.uk/taxquestion24...
The important thing to be aware of is that letting a furnished holiday home is NOT treated the same as a buy to let for tax purposes. In most cases, the tax treatment is more beneficial.
i) HMRC looks on a holiday letting as a form of business rather than as an income being generated from an investment. In UK tax, there is a fundamental difference between investment income and business income.
ii) Because of the different treatment, a holiday let can offset more costs against its income than a holiday let
iii) a holiday let activity can claim Capital Allowances against its profits - a buy to let cannot
iv) over the next few years, full relief on interest and finance charges will not be claimable against buy to let income. This restriction will NOT apply to income from holiday lets
v) because the property is taxed as a business, Entrepreneur's Relief is available when the property is eventually sold.
vi) because holiday let profits are "business" profits, they can be used as part of your income when calculating how much you can pay into a personal pension i.e. they are classed as part of your Net Relevant Earnings
Gifting or giving away property to an another individual (even if you are currently in a relationship) does have tax consequences and can be fraught with risk - so be very careful about moving down that path.
i) HMRC looks on a holiday letting as a form of business rather than as an income being generated from an investment. In UK tax, there is a fundamental difference between investment income and business income.
ii) Because of the different treatment, a holiday let can offset more costs against its income than a holiday let
iii) a holiday let activity can claim Capital Allowances against its profits - a buy to let cannot
iv) over the next few years, full relief on interest and finance charges will not be claimable against buy to let income. This restriction will NOT apply to income from holiday lets
v) because the property is taxed as a business, Entrepreneur's Relief is available when the property is eventually sold.
vi) because holiday let profits are "business" profits, they can be used as part of your income when calculating how much you can pay into a personal pension i.e. they are classed as part of your Net Relevant Earnings
Gifting or giving away property to an another individual (even if you are currently in a relationship) does have tax consequences and can be fraught with risk - so be very careful about moving down that path.
Edited by Eric Mc on Sunday 14th August 08:30
Sir Bagalot said:
How much do you trust your partner? I'm a higher rate taxpayer and almost all our investments are in Lady B's name.
Onsite management do the letting? You might want to check what percentage they charge. 20% isn't unheard of!!
Sit down and look at all the figures in the cold light of day .
Onsite management? Is this a caravan/home park? If so is there scope for capital growth?
Partner trusted 100%, absolutely no doubt on that one. Together 17 years with a 10 years old son. Onsite management do the letting? You might want to check what percentage they charge. 20% isn't unheard of!!
Sit down and look at all the figures in the cold light of day .
Onsite management? Is this a caravan/home park? If so is there scope for capital growth?
Edited by Sir Bagalot on Sunday 14th August 01:48
Working on assumption that management company would take more than 20%, but thought initially it would be worth it just while we get up and running.
It's at The Bay, Filey. Not much scope for growth but our mindset is if we can get some good use out of it throughout the year, even if we let out during summer at peak times, we'd have a nice little assert by the time we retire.
Been looking on and off for a couple of years after staying there a couple of times.
Thanks for the reply.
Kwackersaki said:
We were in a similar position and the links below will help explain what you can do.
http://www.taxlandlord.com/tax-saving-trust-declar...
http://www.property-tax-portal.co.uk/taxarticle100...
http://www.property-tax-portal.co.uk/taxquestion24...
Thanks, those links are helpful. As far as I can tell then the property could remain in my name for ownership reasons but the rental income could basically be 'given' to her and all tax be paid at her rate. It isn't clear if as owner I could claim expenses back at the higher rate of tax though, but presumably it's not going to be allowed for her to pay tax at lower rate on income and me claim back tax at my higher rate for expenses. http://www.taxlandlord.com/tax-saving-trust-declar...
http://www.property-tax-portal.co.uk/taxarticle100...
http://www.property-tax-portal.co.uk/taxquestion24...
If you "give away" all the income to another person, you have in effect already "given away" any right you would have had to claim any expenses relating to that income.
You need to understand that the "income" on which a person pays tax is the income AFTER all the allowable costs and capital allowances have already been claimed.
Giving away the share of the profits (or losses) you would have had will also have an impact when the property is eventually sold - so beware of the long game in these types of set ups.
You need to understand that the "income" on which a person pays tax is the income AFTER all the allowable costs and capital allowances have already been claimed.
Giving away the share of the profits (or losses) you would have had will also have an impact when the property is eventually sold - so beware of the long game in these types of set ups.
Eric Mc said:
If you "give away" all the income to another person, you have in effect already "given away" any right you would have had to claim any expenses relating to that income.
You need to understand that the "income" on which a person pays tax is the income AFTER all the allowable costs and capital allowances have already been claimed.
Giving away the share of the profits (or losses) you would have had will also have an impact when the property is eventually sold - so beware of the long game in these types of set ups.
Thanks Eric, assumed that would be the case but hoped I might just get lucky and there be a loophole that could be exploited like those with loads of brass tend to find! You need to understand that the "income" on which a person pays tax is the income AFTER all the allowable costs and capital allowances have already been claimed.
Giving away the share of the profits (or losses) you would have had will also have an impact when the property is eventually sold - so beware of the long game in these types of set ups.
Next step for us is to get ourselves a financial advisor specialising in this sort of thing and go through our specific circumstances with them and take it from there.
Are my 'site fees' likely to be an expense we could claim back?
Tony Angelino said:
Thanks Eric, assumed that would be the case but hoped I might just get lucky and there be a loophole that could be exploited like those with loads of brass tend to find!
Next step for us is to get ourselves a financial advisor specialising in this sort of thing and go through our specific circumstances with them and take it from there.
Are my 'site fees' likely to be an expense we could claim back?
What do you mean by "site fees"?Next step for us is to get ourselves a financial advisor specialising in this sort of thing and go through our specific circumstances with them and take it from there.
Are my 'site fees' likely to be an expense we could claim back?
Eric Mc said:
What do you mean by "site fees"?
It's a holiday home village, proper bricks and mortar houses not caravans or chalets, but as there is a pool on site etc they charge a monthly fee much the same as the caravan parks.See below:
http://www.thebayfiley.com/home.html
Thanks.
Annual site fees, in this case, would be allowable against the annual income.
Essentially, when running a business, the general rule is that any expenditure incurred wholly and exclusively in respect of the trading activity is allowed.
There are certain restrictions of course (as ever).
The first and most important is that all business must distinguish between "Capital" costs and "Revenue" costs. This is a basic accounting issue and is recognised in tax law as well.
"Capital Expenditure" means any costs relating to the purchase of the assets used in the business.
Obviously, when dealing with a property based business, such as a "Holiday Let", the single biggest capital cost is the cost of the property itself. This cost is made up of the actual purchase cost plus all the ancilliary costs associated with buying the property such as estate agent's fees, stamp duties and legal fees.
Other capital costs would be expenditure on upgrading or extending the property. This would include any costs incurred in bringing the property up to a standard where it complies with regulations related to the trade (e.g. fire doors, fire escapes etc).
The installation of fitted wardrobes, carpets etc would also be treated as capital expenditure.
Other types of capital costs would be the movable furniture, beds, electrical equipment etc
The point about all this "Capital Expenditure" is that you CANNOT deduct these costs as a simple deduction against the annual trading income. This does not mean you will not get any tax relief. What it does mean is that you need to claim tax relief through the Capital Allowance claim regime applicable to the class of asset.
The "Revenue Costs" that you CAN deduct against the normal annual trading income would be -
general repairs and maintenance
agent's fees
advertising
light and heat costs incurred by the landlord
property and other business related insurances
any Council Tax and Water Charges incurred by the landlord
accountancy fees regarding the business (but NOT personal tax work)
ground rents
site fees (as explained above)
finance costs (including loan interest)
As mentioned above, the restrictions that will be coming into effect in respect of the claiming of finance costs against rental costs DO NOT apply to the letting of holiday homes.
Essentially, when running a business, the general rule is that any expenditure incurred wholly and exclusively in respect of the trading activity is allowed.
There are certain restrictions of course (as ever).
The first and most important is that all business must distinguish between "Capital" costs and "Revenue" costs. This is a basic accounting issue and is recognised in tax law as well.
"Capital Expenditure" means any costs relating to the purchase of the assets used in the business.
Obviously, when dealing with a property based business, such as a "Holiday Let", the single biggest capital cost is the cost of the property itself. This cost is made up of the actual purchase cost plus all the ancilliary costs associated with buying the property such as estate agent's fees, stamp duties and legal fees.
Other capital costs would be expenditure on upgrading or extending the property. This would include any costs incurred in bringing the property up to a standard where it complies with regulations related to the trade (e.g. fire doors, fire escapes etc).
The installation of fitted wardrobes, carpets etc would also be treated as capital expenditure.
Other types of capital costs would be the movable furniture, beds, electrical equipment etc
The point about all this "Capital Expenditure" is that you CANNOT deduct these costs as a simple deduction against the annual trading income. This does not mean you will not get any tax relief. What it does mean is that you need to claim tax relief through the Capital Allowance claim regime applicable to the class of asset.
The "Revenue Costs" that you CAN deduct against the normal annual trading income would be -
general repairs and maintenance
agent's fees
advertising
light and heat costs incurred by the landlord
property and other business related insurances
any Council Tax and Water Charges incurred by the landlord
accountancy fees regarding the business (but NOT personal tax work)
ground rents
site fees (as explained above)
finance costs (including loan interest)
As mentioned above, the restrictions that will be coming into effect in respect of the claiming of finance costs against rental costs DO NOT apply to the letting of holiday homes.
Edited by Eric Mc on Sunday 14th August 10:47
Eric Mc said:
Annual site fees, in this case, would be allowable against the annual income.
Essentially, when running a business, the general rule is that any expenditure incurred wholly and exclusively in respect of the trading activity is allowed.
There are certain restrictions of course (as ever).
The first and most important is that all business must distinguish between "Capital" costs and "Revenue" costs. This is a basic accounting issue and is recognised in tax law as well.
"Capital Expenditure" means any costs relating to the purchase of the assets used in the business.
Obviously, when dealing with a property based business, such as a "Holiday Let", the single biggest capital cost is the cost of the property itself. This cost is made up of the actual purchase cost plus all the ancilliary costs associated with buying the property such as estate agent's fees, stamp duties and legal fees.
Other capital costs would be expenditure on upgrading or extending the property. This would include any costs incurred in bringing the property up to a standard where it complies with regulations related to the trade (e.g. fire doors, fire escapes etc).
The installation of fitted wardrobes, carpets etc would also be treated as capital expenditure.
Other types of capital costs would be the movable furniture, beds, electrical equipment etc
The point about all this "Capital Expenditure" is that you CANNOT deduct these costs as a simple deduction against the annual trading income. This does not mean you will not get any tax relief. What it does mean is that you need to claim tax relief through the Capital Allowance claim regime applicable to the class of asset.
The "Revenue Costs" that you CAN deduct against the normal annual trading income would be -
general repairs and maintenance
agent's fees
advertising
light and heat costs incurred by the landlord
property and other business related insurances
any Council Tax and Water Charges incurred by the landlord
accountancy fees regarding the business (but NOT personal tax work)
ground rents
site fees (as explained above)
That great, thanks again it helps me understand more before I go further. As we're not actually trying to make a profit from the arrangement, at least not on a monthly basis and my revenue costs are likely to be more than my profit would there be an argument for keeping it all in my name as a higher tax payer as in theory I will be deducting more in expenses than I will be paying in tax, or have I got completely the wrong end of the stick. Essentially, when running a business, the general rule is that any expenditure incurred wholly and exclusively in respect of the trading activity is allowed.
There are certain restrictions of course (as ever).
The first and most important is that all business must distinguish between "Capital" costs and "Revenue" costs. This is a basic accounting issue and is recognised in tax law as well.
"Capital Expenditure" means any costs relating to the purchase of the assets used in the business.
Obviously, when dealing with a property based business, such as a "Holiday Let", the single biggest capital cost is the cost of the property itself. This cost is made up of the actual purchase cost plus all the ancilliary costs associated with buying the property such as estate agent's fees, stamp duties and legal fees.
Other capital costs would be expenditure on upgrading or extending the property. This would include any costs incurred in bringing the property up to a standard where it complies with regulations related to the trade (e.g. fire doors, fire escapes etc).
The installation of fitted wardrobes, carpets etc would also be treated as capital expenditure.
Other types of capital costs would be the movable furniture, beds, electrical equipment etc
The point about all this "Capital Expenditure" is that you CANNOT deduct these costs as a simple deduction against the annual trading income. This does not mean you will not get any tax relief. What it does mean is that you need to claim tax relief through the Capital Allowance claim regime applicable to the class of asset.
The "Revenue Costs" that you CAN deduct against the normal annual trading income would be -
general repairs and maintenance
agent's fees
advertising
light and heat costs incurred by the landlord
property and other business related insurances
any Council Tax and Water Charges incurred by the landlord
accountancy fees regarding the business (but NOT personal tax work)
ground rents
site fees (as explained above)
Thanks again, will definitely get a ifa before going any further.
You don't want an IFA. You want an accountant (they aren't the same type of animal).
When a trading activity creates a loss (not that unusual), it is possible for the loss incurred to be offset against the trader's other income. If the trader has, for example, a salaried employment, they will be paying PAYE on that salary. If they offset the trading loss against their "Other Income" when completing their Self Assessment tax return, in theory they would be able to get some of the tax they had paid through PAYE refunded to them.
Up until 2012, it was possible to do this with losses from Holiday Lets (because it was looked on as a trade).
However, since tax year 2012/13 this type of loss relief was blocked for Holiday let losses. It still exists for more "normal" trading activities.
So, to cut a long story short, making a loss with your Holiday Let won't allow you to reclaim any tax already paid elsewhere.
All that can be done with losses incurred by Holiday Lets is to carry the losses forward so they can be offset against any profits generated in future years.
When a trading activity creates a loss (not that unusual), it is possible for the loss incurred to be offset against the trader's other income. If the trader has, for example, a salaried employment, they will be paying PAYE on that salary. If they offset the trading loss against their "Other Income" when completing their Self Assessment tax return, in theory they would be able to get some of the tax they had paid through PAYE refunded to them.
Up until 2012, it was possible to do this with losses from Holiday Lets (because it was looked on as a trade).
However, since tax year 2012/13 this type of loss relief was blocked for Holiday let losses. It still exists for more "normal" trading activities.
So, to cut a long story short, making a loss with your Holiday Let won't allow you to reclaim any tax already paid elsewhere.
All that can be done with losses incurred by Holiday Lets is to carry the losses forward so they can be offset against any profits generated in future years.
Jockman said:
Eric would you use the Capital Costs for relief when you came to sell the asset?
Capital costs in respect of the purchase of the property and any enhancements to the property during its period of ownership are offsetable against the sale proceeds of the property - i.e. when calculating any Capital Gains on sale or disposal.Capital costs on equipment would generally be claimable on an annual basis using the relevant Capital Allowance rules in place at the time. This, of course, applies to Holiday Lets and NOT buy to lets.
Eric,
Slight thread hijack but maybe useful to make the distinction between BTL and FHL.
On a BTL are you still allowed to offset capital expenditure on certain items, e.g. uPVC windows or an extension (i.e. fabric of the building rather than electrical items, furniture etc) come sale time?
Slight thread hijack but maybe useful to make the distinction between BTL and FHL.
On a BTL are you still allowed to offset capital expenditure on certain items, e.g. uPVC windows or an extension (i.e. fabric of the building rather than electrical items, furniture etc) come sale time?
h0bbsy said:
Eric,
Slight thread hijack but maybe useful to make the distinction between BTL and FHL.
On a BTL are you still allowed to offset capital expenditure on certain items, e.g. uPVC windows or an extension (i.e. fabric of the building rather than electrical items, furniture etc) come sale time?
Capital Allowances are not available for buy to let residential properties - end of story. They are specifically aimed at trading entities - sole traders, partnerships, trading limited companies. Holiday Lets are treated (mostly) the same as a trading activity (there are a few restrictions as mentioned above) so Capital Allowances are claimable against the annual holiday let profits.Slight thread hijack but maybe useful to make the distinction between BTL and FHL.
On a BTL are you still allowed to offset capital expenditure on certain items, e.g. uPVC windows or an extension (i.e. fabric of the building rather than electrical items, furniture etc) come sale time?
What you are describing are not "Capital Allowance" type items. What you are describing are "Enhancement Costs" which are added to the original cost of the property and will be offset against the disposal proceeds of the property when it is eventually sold or disposed of.
"Capital Allowances" are specific to trading operations (in the most part).
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